"Buyer-Side" Mitigation in Organized Capacity Markets: Time for a Change?
Miller, Richard B., Butterklee, Neil H., Comes, Margaret, Energy Law Journal
Synopsis: This article presents an analysis of the current status of buyer-side mitigation in wholesale competitive capacity markets. Buyer-side mitigation, which takes the form of a potential minimum offer floor for all new generation entrants, has been implemented by the Federal Energy Regulatory Commission (FERC) to deter the subsidization of new entry that could unduly depress capacity market prices. In addition to reviewing the reasons for and current status of buyer-side mitigation, this article takes the position that the FERC has been overly broad in its implementation of buyer-side mitigation rules by requiring every new entrant to prove that its facility is economic or be subject to an offer floor. The authors believe that there is room for the FERC to modify its rules and create safe harbors for certain new entrants while, at the same time, maintaining its ability to supervise competitive wholesale capacity markets such that they are not subject to undue interference and result in just and reasonable rates.
Over the last twenty years, the electric industry has see-sawed as regulators seek to strike the right balance between using competitive forces and regulation to establish just and reasonable rates. Nowhere is this tension more evident than in regulation of capacity1 markets in organized wholesale markets administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). Indeed, the degree of litigation that has taken place at the Federal Energy Regulatory Commission (FERC) over the administration of capacity markets has served to impede the smooth functioning of those markets. This litigation has involved many aspects of the capacity markets. One issue that has been particularly contentious recently involves buyer-side mitigation. Buyer-side mitigation refers to offer floors that have been put in place by the FERC to deter large net buyers2 and local governments from subsidizing new entry and artificially depressing capacity market prices.
This is a legal article written by lawyers. Economists have offered and will continue to offer opinions on what makes economic sense in terms of buyer-side mitigation. This article will explore the extent to which the FERC is properly approving buyer-side mitigation proposals from ISOs and RTOs in terms of its statutory authority to determine just and reasonable rates and to use competitive market forces to substitute for cost-of-service rates. This article proposes that even though RTO/ISO capacity markets are not markets in the traditional sense, they are still markets where the final price is a function of supply and demand. Therefore, the FERC should analyze buyer-side mitigation within the context of its decisions such that competitive market forces determine the price of capacity. This article further proposes that the FERC should not intervene in capacity markets in order to establish what it believes to be a just and reasonable rate that will prevent the market price from being "too low," regardless of whether price depression is the result of market manipulation or market power abuse. Because the FERC has adopted this approach, it now subjects all new entry to a test to determine whether it will unduly depress market prices unless it can show it is economic new entry. If the new entry is deemed "uneconomic," it is subjected to a minimum offer floor that could prevent the new entry resource from clearing in the capacity market auction. In contrast, this article proposes that the FERC should not subject new entry to buyer-side mitigation in the\ absence of market power or a finding that there has been a specific intent to manipulate the markets.
At the same time, this article also considers the degree to which the FERC should let states and local governments pursue public policy goals even when they interfere with capacity markets. Now is the perfect time to re-consider the current state of buyer-side mitigation rules given that the FERC has stated that ISOs and RTOs should be allowed to consider and authorize cost allocation for transmission built for public policy reasons. …